Private Company Liquidity

For high growth companies, one of the most efficient and effective ways to align interests among stakeholders, and to allocate wealth among those who help to create it, is through the issuance of stock, stock options and restricted stock units. This holds true for companies at the very earliest stages of formation all the way to large, publicly traded entities whose prospects for growth continue.

Stock options are most valuable when the underlying stock can be readily exchanged in a wellfunctioning, liquid marketplace. Stock options for public market companies are the premiere example of this. For example, those employees who received stock options of publicly traded Apple, Inc. in 2003 at a strike price of $9.00 per share, and whose awards vested during the following years, have enjoyed spectacular returns on their investment of time as they have collectively built AAPL to approximately $400 per share as of this writing. This represents a $350 billion market cap, making AAPL among the most valuable companies on the planet.1 For the hypothetical employee, this represents an instantaneous gain of $391 per share, or 43.5 times the strike price of the stock in only eight years.

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1) I use examples such as Apple because publicly traded companies on the Nasdaq Global Market and the New York Stock Exchange are rich in data transparency and valuations are trustworthy due to robust market dynamics. However, this paper will be focused on private companies, where valuation is uncertain in the absence of a public market.
2) The author is affiliated with Arcstone Valuation, a nationally recognized business valuation firm, and Arcstone Equity Research, an independent investment research firm.

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